The House voted late on Tuesday to pass a bill that will change significant aspects of Dodd-Frank, the banking reform bill introduced after loose lending and risky maneuvers by financial institutions led to the country's worst recession since the Great Depression.
Since it passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act has been the target of animosity by many conservatives and the banking industry. Given President Donald Trump's animosity toward Dodd-Frank, it seems likely the bill will become law, having already passed in the Senate in March.
Those in favor say changes will enable smaller banks to lend and compete more easily. Others call the move a giveaway.
"These banks are back to making record profits, but Washington insists on doing them more favors, even if it means raising the risk of another bailout," Sen. Elizabeth Warren, D-Mass., told NBC News.
Dodd-Frank's fractious foundation
Dodd-Frank was an attempt to reestablish oversight and control over financial institutions after the economic meltdown of the late 2000s. Major banks went bankrupt. Markets collapsed. Millions of homeowners fell into foreclosure or lost savings. Available credit dried up. The federal government fronted trillions of dollars to shore up the economy. The Federal Reserve bought toxic financial assets and slashed interest rates to stabilize the situation.
The 2,300-page bill included new regulatory requirements for banks, creation of the Consumer Financial Protection Bureau, expansion of oversight of hedge funds and private equity firms, increased bank reporting requirements, and the so-called Volcker Rule.
That rule reduced the ability of banks to use consumer and business deposits for speculative investments. Without it, banks could fund risky investments with deposits and, if their bets went bad, turn to federal deposit insurance to make good the losses.
The legislation and resulting rules chafed the industry. Particular sore points were increased reporting, higher levels of cash on hand, stress tests to evaluate the health of institutions, the Volcker Rule, and greater scrutiny of mortgage lending. Smaller banks complained about compliance costs, according to a study from the Mercatus Center of George Mason University. Those banks also said that new CFPB rules to "make a reasonable, good faith determination of a consumer’s ability to repay [a mortgage]" were overly burdensome. Many claimed to be rethinking whether to offer residential mortgages at all.
Even some supporters of the legislation like former Federal Reserve Governor Daniel Tarullo, appointed by President Barack Obama, have raised questions about the law's implementation. In a 2017 address, he said, "[W]e have found that the $50 billion in assets threshold established in the Dodd-Frank Act for banks to be 'systemically important,' and thus subject to a range of stricter regulations, was set too low."
In the proposed changes, to be called "systemically important" and subject to more regulations, banks would need assets of $250 billion, rather than the current $50 billion. That significantly reduces the number considered too big to fail. Only nine U.S.-chartered commercial bank holding companies would meet the definition, according to data from the Federal Reserve. Such large regional banks as State Street, SunTrust, the U.S. division of HSBC, Fifth Third, and KeyBank, and Citizens Bank would be under the limit.
The new bill will "allow the mid-sized banks to not be under such scrutiny when it comes to their lending practices," said Jonathan McCollum, director of federal government relations at law firm Davidoff Hutcher & Citron LLP, who has worked with some banks that have lobbied for the changes.
However, many original supporters of Dodd-Frank say that the rollback is a mistake. Rep. Al Green, D-Texas, sees the move as a wrongheaded shift from focus on the entire system to individual banks.
"The $50 billion trigger was a very important aspect of Dodd-Frank," said Green, who was in Congress when the legislation originally passed. "If we don't regulate the entire system and we try to do this on a piecemeal basis [of looking at a handful of banks], we will put the entire system at risk."
Relaxation of rules on mortgage reporting would eliminate the availability of data that can show racial bias in lending, Green says. And banks with under $10 billion could ignore the Volcker Rule, allowing them to use deposit funds in speculation. In the 1980s, conditions among small savings and loan institutions resulted in a financial crisis, showing how even small institutions can create major problems.
Winners and losers depend on where you stand. Many banks, from the bigger regional ones to small community institutions, get varying degrees of relief, which might let them complete more easily with big banks. Banking giants are still considered systemically important and so don't get a regulatory break — yet. However, this success could embolden the industry to push for even looser controls.
As for consumers, it's hard to say what the future brings. Perhaps they will get better services. In the short run, more likely is the continuation of business as is. Further out, maybe not. Financial crises happen about once every 10 years, as the American Enterprise Institute noted. Reducing oversight and regulation of the financial services industry could be fuel to the fire and costly in the long run.